What do you want to be when you grow up?

The recent heat being applied to BT from some of its competitors to divest its infrastructure business, Openreach, gets to the heart of some of the biggest questions in the telecom sector. BT, the UK’s largest fixed / broadband and growing content provider wants to acquire the UK’s largest mobile operator, EE Unsurprisingly its rivals are crying “monopoly” and seeking for it to sell off its access business. 

What do you want to be when you grow up?This debate brings at least two big questions to mind. First, the ‘what do I want to be when I grow up?’ question. Historically phone companies faced investing huge amounts of capital in infrastructure before the first call could be made. But today, all that has changed – new players like Uber can quickly enter the market without that barrier to entry, offering a huge variety of innovative digital services. They can grow very rapidly and provide their shareholders with quick and relatively low risk returns. Unsurprisingly Amazon, Facebook, Twitter, Salesforce and Netflix all have price/ earnings ratios at least double that of typical infrastructure telecom providers like BT and AT&T and a report by PWC last year put the return on capital in the telecom industry as about 3% below the cost of that capital. Recent reports of falling service quality across many mobile networks tend to confirm underinvestment. 

So why invest in infrastructure at all? Why don’t communications providers transition to being a pure-play digital services company and use someone else’s infrastructure at a fraction of the cost? A debate heard in many board rooms I’m sure and while there are a myriad of reasons why not, the financial logic behind the question is compelling. 

That opens up the second big paradox – if every telecom company did that, nobody could do anything: advanced communications are the ‘digital dial-tone’ that connects everything. That’s a big problem for governments who now begin to understand the critical impact on their economies of having an advanced digital infrastructure. 

However, they often speak with forked tongues - much of the world’s telecom regulatory regimes don’t reflect this need and date from the era breaking down monopolies. This forced infrastructure competition, meaning costly multiple infrastructures have been built and regulators did not foresee the need for rapid re-investment in newer, faster technologies and much increased capacity. It’s a picture that simply unattractive to many investors and so some there has been some easing of regulations to allow operators to share infrastructure and allow mergers and acquisitions to take place. But the concerns about a return to the dead-hand days of monopoly are very real – competition has undoubtedly delivered a communications explosion and dramatic falls in prices for consumers. 

So what’s to be done – on one hand, the drying up of capital investment in infrastructure and on the other, the potential for predatory actions by a much reduced set of infrastructure providers. Net Neutrality is an attempt to solve this problem through legislation but it may well simply not be possible to do this with a market and technology that is moving so fast. 

A better way would be to align the interests of all of the players in the digital ecosystem. Users, governments and application providers want fast, reliable and low cost communications without any impediments and infrastructure providers want fair rate of return. So why don’t the application providers who are making good returns invest in infrastructure – not on their own by collectively perhaps even on a not-for-profit basis. It’s not such a new idea – in 1949, 11 airlines founded a global communications provider called SITA and it has grown to have 450 airlines owning and using it. All of the airlines share the cost and the infrastructure provides what the airlines need - the interests of the user and the infrastructure provider are aligned. 

So far from me to give advice to BT but for those companies baying to have them sell off OpenReach, why not float it as a separate company and invite others to invest, perhaps in proportion to their planned usage. I’m sure BT’s share price would rise!

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